How to Borrow Money if You’re Bankrupt

January 23, 2014

One of the most difficult situations to overcome is bankruptcy. When you declare bankruptcy, it can be difficult to recover – and to convince creditors to lend to you again.

While it might be difficult to find lenders after you file for bankruptcy, it is possible to borrow money even in this dire situation. Getting to that point might require some hard work on your part, though.

You Can Borrow as Long as Someone is Willing to Lend

Understand that anyone can borrow any amount, as long as a lender is willing to take a chance. Even if you are bankrupt, you might be able to find lenders willing to work with you. Realize, though, that if you are in an open Chapter 13 bankruptcy, you will need to get permission from the bankruptcy court to borrow.

Consider looking for lenders that specialize in poor credit loans and after-bankruptcy loans. Understand that you will likely have to accept the following conditions if you borrow money following a bankruptcy filing:

Much higher interest rate

Willingness to secure the loan with some sort of asset

Smaller loan amount

Because you have shown yourself a credit risk, lenders want to protect themselves, and this means that you will pay a higher price in order to borrow money. As you make your payments on time and in full, though, your credit should improve, and you will have access to better terms.

Improve Your Credit First

In many cases, it makes sense to improve your credit before you try to borrow after a bankruptcy. The first step is to make all of your payments – from utilities to insurance premiums to credit cards – on time. One tactic many use following bankruptcy is to apply for a secured credit card to help rebuild credit by showing responsible habits. You can use alternative credit scoring, like that offered by eCredable and PRBC to establish a positive payment record with non-credit accounts.

Overcoming a bankruptcy is not something that can be done overnight. You will have to show responsible behaviors for 12 to 24 months if you want to be considered by many more traditional lenders, especially if you want to try to qualify for a mortgage. Work to boost your credit score, and you’ll be more likely to be seen as an acceptable risk moving forward.

Add a Statement to Your Credit Report

It’s also possible for you to add a statement to your credit report. If your bankruptcy was the result of circumstances beyond your control, such as a major medical catastrophe, a messy divorce, or a job loss followed by a long period of unemployment, you can add a statement to your credit report. This statement tells your side of the story, and might help some lenders decide to take a chance on you after all.

In some cases, a lender might require you to create a statement for submission with your loan application. Your statement should concisely describe the conditions that led to your bankruptcy, as well as outline what you have done to improve your situation, and your plans for improving your financial management in the future. There are lenders that understand extenuating circumstances, and a well-written statement can go a long way toward helping you qualify for a loan.

Bottom Line

You can borrow money if you are bankrupt. However, you need to be willing to pay a higher price, and take extra steps to show that you are capable of meeting your obligations this time around.

Have you gone through bankruptcy? Tell us your story and if you can still borrow money. Leave a comment!

This article was originally published January 23, 2013.

Will this article help you save or earn more money? Get others like it simply by entering your email address below. Your email is used only for delivering daily money tips and you can opt out of delivery at any time. Click here to see all your free subscription options.

Miranda writes about personal finance almost every day. An experienced freelance writer, she's covered your money online and in print from every angle and is always looking for new ones.

Comments

6 Responses to How to Borrow Money if You’re Bankrupt

Glad to read your post. Would have been interesting to hear more about best loan sources for folks coming out of bankruptcy such as myself.

@Matt: Try a little compassion. There are a wide variety of situations that can lead to bankruptcy not all due to bad spending habits (such as medical issue for someone without insurance or who lost their job and cannot keep up with the mortgage). Not everyone who comes out of bankruptcy is looking to spend recklessly. In my case, if I was to be relocated by my job I would want to get a new mortgage (I was able to keep my home during BK – long story) or buy a car (used, not fancy to help re-establish credit).

Is this real? What would get someone to bankruptcy in the first place? Answer: borrowing money. So you’re telling people its a good idea to borrow money after they couldn’t pay back the money they previously borrowed. What ever happened to saving money to buy something rather than finance everything. Seriously, think about the logic here. You break a cycle by doing things differently. Borrowing money right after bankruptcy will likely bring you right back down the same path. Mindblowing.